Building sector adds to hopes for economy

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THE strongest growth in new orders for nearly five years and improving confidence in the building industry are adding to hopes that the UK will avoid a double-dip recession.

The latest purchasing managers’ index shows a marked expansion of construction sector output in March, accompanied by a modest increase in job creation.

Commercial was the strongest performer, but housing and civil engineering both grew as well, civil particularly so.

Overall, the index rose to 56.7 from 54.3 in February. A reading of less than 50 indicates contraction.

The strong showing comes after Monday’s positive PMI for the manufacturing sector which revealed a sharp expansion driven by a pick-up in new orders.

Taken together, the figures suggest that the UK economy will grow in the first quarter, but some observers added a note of caution.

Tom Vosa, economist at Yorkshire Bank, said: “With the quarterly British Chambers of Commerce survey predicting growth of 0.3 per cent in the first quarter, support for that contention came from the construction index for March, which smashed expectations for a fall and rose to its highest level since June 2010.

“The PMI suggests that construction should boost GDP growth in the first quarter, but then it suggested the same in Q4 when construction activity fell by 0.2 per cent.”

He warned that housebuilding continues to lag and annual construction rates of 100,960 a year are well below the Barker recommendations of a minimum of 210,000.

Mr Vosa said some of the overall increase was due to the weather, reflecting the snow in February and a much milder March.

“In line with yesterday’s manufacturing data, the construction PMI supports our contention that growth in the first quarter could be 0.4 per cent or higher,” he added.

“We will have to wait to see the service sector survey for March but another strong reading there would help quantify the upside risks to our central projection.”

Howard Archer, economist at IHS Global Insight, said: “On the face of it, this is a very encouraging survey that points to very decent construction expansion in March and clear overall growth in the sector in the first quarter.

“Healthy new orders growth in March also boost hopes that the construction sector can expand in the second quarter.

“Even allowing for March’s good weather boosting activity, this is undeniably a ‘good news’ survey.

“Following on from an improved manufacturing survey, the purchasing managers’ construction survey lifts hopes that the economy had a reasonable end to the first quarter and was therefore able to return to growth over the quarter as a whole.

“If the purchasing managers’ survey for the dominant services sector – out Wednesday – is decent for March, growth in the first quarter will look even more likely.

“We are currently looking for GDP growth around 0.3 per cent quarter-on-quarter in the first quarter.”

The construction sector accounted for around 8 per cent of the UK’s economic output last year.

Most recent figures show that the sector contributed nearly £8 bn to Yorkshire’s £85bn economy in 2010.

But the region’s construction industry is forecast to stagnate between now and 2016, according to the Construction Skills Network.